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Turning uncertainties... into opportunities

Event

Leftist nationalist Andrés Manuel Lopez Obrador comfortably won Mexico’s presidential elections, making him the new president of Latin America’s second-biggest economy as of 1 December. It is the first time Mexico’s president doesn’t belong to the ruling Institutional Revolutionary Party – which ruled the country for almost a century – nor to the traditional opposition party National Action Party, which governed for 12 years. Indeed, Obrador’s Morena (the National Regeneration Movement) only registered as a party in 2014, making it a brand new era for Mexico. The win doesn’t come as a surprise as Obrador, the anti-establishment candidate, had been the front runner from the start as he galvanised on voters’ anger at corruption scandals and their fear of Mexico’s record murder rate. Obrador’s coalition also clinched a majority in both houses of Congress, making him the most powerful president in 20 years. Hence, his administration should be able to easily pass legislation.

Impact on country risk

Obrador promised to govern as a pragmatist, stemming initial fears that his government would plunge Mexico into populist chaos. However, it will take some time before clear policies emerge.

That being said, Obrador is not likely to backtrack on critical reforms (energy, labour, telecommunications, tax) as his party isn’t likely to secure a two-third majority, the threshold needed to reverse constitutional reforms. The majority in Congress, however, gives Morena some room for changes. For example, Obrador can review the more than 100 oil contracts signed as part of the opening up of Mexico’s oil market. Furthermore, a revision of contracts in the infrastructure sector is also in the cards as, according to Obrador, the sector has been affected by corruption. These plans could scare investors and businesses which might even cancel some projects, complicating Obrador’s promise to kick-start the economy (real GDP growth is estimated at 2.3% in 2018).

Obrador’s election adds unpredictability to ongoing negotiations over the future of the North American Free-Trade Agreement (NAFTA). Once a critic of NAFTA, Obrador now supports it. But Obrador is more nationalistic and protectionist than the current government, which could make it harder to reach an agreement on NAFTA with a protectionist US administration.

It is likely the government's role in the Mexican economy will increase in the coming years. Obrador has plans to boost infrastructure spending and increase social programmes. However, without any tax increases, these plans could derail the fiscal consolidation. Obrador has already stressed he will avoid this scenario. His ‘government of austerity’ aims to balance the budget in three years (the fiscal deficit is projected at -2.5% of GDP in 2018) to stabilise the moderate public debt (estimated at 54% of GDP).

The short-term political risk is in category 2/7 with a stable outlook. The country enjoys a low level of external short-term debt while foreign exchange reserves are adequate (covering around 4 months of imports in April 2018). The medium-/long-term political risk is in category 3/7 with a stable outlook. Mexico’s moderate rating reflects its moderate external debt and debt service, modest current account deficits, sound public finances and the country’s economic diversification but large reliance on the US economy.